Fisher Investments UK Reviews the Risks of Home-Country Bias

In Fisher Investments UK’s experience, people are very often more comfortable investing in what is familiar to them. And, we regularly find investors think companies local to them – those they frequent and know best – are those familiar names, whilst seeing names from other nations as risky unknowns. But this home-country bias can bring big risks of its own. Here Fisher Investments UK explains.

How can home-country bias – the belief equities from your own country are inherently superior or less risky – cause problems? For one, many nations – even big ones like America – may have concentrations in select sectors and companies, risking a lack of diversification. This can both limit opportunities and heighten risk. The large US market is nearly one-third Technology equities, exceeding the World’s 24%.[i] Excluding the US, Technology is just 10%.[ii] In Fisher Investments UK’s review, the US’s heavy Tech weighting may be fine when Tech equities are leading, as they have frequently done in recent years.[iii] But it could present problems when that isn’t the case.

Or consider Switzerland. Its top five equities by market capitalisation make up 50% of the total.[iv] Almost a third of the Swiss equity market is in Health Care, compared with the MSCI World Index’s 12%.[v] Switzerland’s next largest sector is Consumer Staples at 19%.[vi] Both Health Care and Staples are what Fisher Investments UK considers defensive sectors. Because demand for their products tends not to fluctuate much, our research shows they typically lead during broad market weakness – not during economic expansions and periods of overall rising equities. Meanwhile, there are almost no listed Tech equities in Switzerland beyond a handful of very small companies.[vii]

From nation to nation, sector and equity concentrations vary. In Spain, Financials and Utilities have big sway.[viii] Germany’s Automotive industry is large relative to the rest of the world.[ix] On and on – differences like this can significantly affect how a local-only portfolio may look and perform. A local-only investor could find themselves shopping from a very limited menu of options. In the same way that holding only a single equity or handful of them magnifies portfolios’ company-specific risks, owning just one or a few countries’ equities can concentrate exposure to their main sectors and industries. If they fall out of favour, portfolios owning only them could suffer inordinately.

Fisher Investments UK also finds countries have their own unique political and economic drivers. For example, if a country passed radical legislation – e.g., big changes to regulations or property rights – with uncertain effects on a wide swath of its businesses, that could make its equities lag or even fall. Or, a country with a less competitive private sector could struggle relative to its peers if its legislature doesn’t pass reforms with a high likelihood of addressing its issues. Or if monetary policy is confused and haphazard, we find that can also affect markets’ returns.

On the flip side, some countries may benefit more than others during global economic upswings – and vice versa – depending on the makeup of their businesses and international trade ties. Looking only locally can blind investors to the bigger picture. We think global diversification is the antidote to home-country bias. Assessing areas abroad lets you find the best opportunities wherever they may be.

Of course, home-country bias may seem like less of an issue if yours is leading global markets. But the point isn’t to slavishly follow past performance – a losing proposition, based on Fisher Investments UK’s reviews of financial history – it is that no country leads for all time, based on our research. Couple that with the general principle that anyone and everyone could always be wrong, and we think it becomes clear home-country bias – or focussing on just one area – works against investors’ long-term interests.

Diversifying globally can mitigate the risk geographic – and related sector or style – rotation works against you. Take MSCI Sweden and Finland – which both soared in the late 1990s and early 2000 as the demand for wireless networking equipment and cell phones took off, notably bolstering a certain two Scandinavian firms supplying such products.[x] Whilst initially they may have been opportunities for globally minded investors not based in those countries, Fisher Investments UK finds they also presented idiosyncratic country risks in the dot-com bubble’s aftermath. Home-country bias could have blinded local investors and disproportionately exposed them to the fallout. Global investing helps inoculate against this downstream effect of home-country bias, in our view.

In sum, we find home-country bias can raise risk and cap portfolio prospects. Whereas in Fisher Investments UK’s reviews of global diversification, broadening your scope helps limit such risks, whilst expanding your opportunity set.

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